Concerns about a potential recession in the US may be overblown, with underlying economic conditions and expected interest rate cuts on the horizon suggesting an economic downturn is unlikely, according to an Australian fund manager.
Yarra Capital Management head of macro and strategy Tim Toohey acknowledged while the risk of a recession appears to have increased, he estimates the probability of one occurring at 30 per cent primarily because he believed the US Federal Reserve will act to stimulate the economy through a series of rate cuts later in the year.
“While I was surprised that Federal Reserve market pricing for a cut wasn’t higher for July, it’s likely that the Federal Reserve will be doing 50 basis point moves in September and December,” Toohey noted.
“The Federal Reserve has done a pretty reasonable job faced with the information they had available at hand. It’s clear they discussed easing in July, and no doubt they sense a greater degree of urgency to act now to forestall a larger-than-desired easing of the labour market.
“As such, there is no clear policy error at this point that could lead to non-linear outcomes.”
He also suggested recent volatility in equity markets should be seen as a necessary correction rather than a sign of stalling economic growth and downplayed concerns about a decline in business and consumer confidence, noting that sentiment was already low.
“The good news is that we are about 50 per cent through the adjustment in equity markets, and that concerns over excess inflation can now be relegated to history,” he said.
“Rate cuts are clearly coming in size and, once the early signs appear that the easing is having its desired impact and the US election outcome is known, it’s likely that equity markets will be more focused on economic recovery than recession.”
Yarra Capital Management head of Australian equities research Katie Hudson said despite a recent sell-off in the equities market, several compelling opportunities remain for investors.
“In particular, we are seeing opportunities to build holdings in the small cap space, [for example] well-placed real estate investment trusts which are trading at significant discounts to asset backing, despite valuations stabilising and, in some cases, once again expanding,” she explained.
“[There may also be some value in] industrial companies with good business models and strong management teams which have been sold off on cyclical concerns, and in high-quality growth companies where valuation support is improving.”
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